Reimbursement of Expats Salary to Foreign Parent Company Is Not Fees for Technical Services

(ITAT Delhi Judgement – Toshiba Secondment Case) 

Case Study Overview

This case study analyses a significant ITAT Delhi judgement which addresses its view on an issue that has arisen repeatedly before tax authorities specially in international taxation India - whether salary reimbursement paid to a foreign parent company for seconded expatriate employees can be taxed as Fees for Technical Services (FTS).

The ruling provides crucial clarity on Secondment of employees India, FTS vs salary taxation, and the correct expat salary tax treatment under the India Japan DTAA. It confirms that pure salary reimbursement, without any profit element, does not qualify as FTS.

The decision was delivered in the case of Toshiba Corporation vs Deputy Commissioner of Income Tax (International Taxation) by the Income Tax Appellate Tribunal, Delhi Bench, on 1 December 2025.

 Facts of the Case

• Toshiba Corporation, Japan, is a tax resident of Japan and part of a global multinational group.
• Certain employees of the Toshiba group were seconded to Indian group companies such as:
  • Toshiba India Pvt. Ltd.
  • Toshiba JSW Power Systems India Pvt. Ltd.
  • Toshiba Transmission & Distribution Systems India Pvt. Ltd.
  • Toshiba Software India Pvt. Ltd.
• These employees worked exclusively in India and performed duties under the control, supervision, and direction of Indian entities.
• Employment contracts and appointment letters were issued by Indian companies, clearly establishing an employer–employee relationship.
• For administrative convenience, salaries were initially paid in Japan and later reimbursed by Indian companies to Toshiba Japan.

• The reimbursement:
  • Was on a cost-to-cost basis
  • Did not include any mark-up
  • Was supported by invoices, Form 15CA/15CB, and payroll documents
• Indian entities:
  • Deducted TDS under section 192
  • Issued Form 16
  • Treated the payments as salary in books of account

However, during assessment, the Assessing Officer treated the reimbursement amounting to

₹10.76 crore as Fees for Technical Services under:

• Section 9(1)(vii) FTS
• Article 12(4) of the India Japan DTAA 

Issue for Consideration

Whether salary reimbursement paid to a foreign parent company for seconded expatriate employees should be treated as:

• Fees for Technical Services (FTS), or
• Salary income, taxable in India in the hands of the employees

This issue lies at the core of FTS vs salary taxation in cross-border secondment arrangements.

ITAT Delhi Judgement (Dictation / Findings)

The ITAT Delhi judgement ruled in favour of the taxpayer and held that the reimbursement cannot be treated as FTS. The Tribunal made the following important observations:

1. Existence of Employer–Employee Relationship

• Employment contracts clearly showed that:
  • Indian companies had the right to supervise and control the employees
  • Indian companies could terminate employment

• Toshiba Japan did not retain control over daily work.
• Therefore, the seconded personnel were employees of Indian entities, not service providers. 

2. Salary Reimbursement Does Not Constitute FTS

• Once a payment is taxable under the head “Salary”, it cannot be recharacterized as Fees for Technical Services.
• Section 9(1)(vii) FTS specifically excludes payments chargeable under the head “Salaries”.
• The Tribunal confirmed that salary reimbursement FTS treatment is legally incorrect.

3. India Japan DTAA Clearly Excludes Salary Payments

• Article 12(4) of the India Japan DTAA excludes payments made to employees from the definition of FTS.
• Since the expatriates were employees rendering services in India, their remuneration fell outside Article 12.
• Therefore, India Japan DTAA overrides domestic law in favour of salary taxation.

4. Reimbursement Without Mark-Up Is Not Income

• The reimbursement was purely cost recovery, with no profit element.
• Toshiba Japan did not earn any income from the transaction.
• Hence, this falls squarely under Reimbursement not FTS case laws consistently upheld by courts.

5. Northern Operating Systems Case Not Applicable

• The Revenue relied on the Supreme Court ruling in Northern Operating Systems.
• ITAT clarified that:
  • The case related to service tax
  • It dealt with manpower supply services
• It is not applicable for income-tax classification of FTS, especially under DTAA provisions.